Impacts of Increasing Demand for Vehicles and Crude Oil on Exchange Rate in Sri Lanka

Abstract

Economic development and transport are solely linked since the transport activity is a key component of economic development and human welfare. The main objectives of this study are to identify, whether or not the expansion of transport sector and the resultant ballooning of imports bill due to this incidence had a significant impact on the exchange rate in Sri Lanka. For this purpose, data were collected from the Ceylon Petroleum Cooperation, annual reports of CBSL, the Department of Motor Traffic and the World Bank database. Augmented Dicky-Fuller (ADF), Johansen cointegration test and vector error correction model were employed as major econometrics procedures to identify the impacts of vehicles and crude oil imports on the exchange rate in Sri Lanka. This study revealed that vehicle imports and crude oil imports are positively affected to depreciate the Sri Lankan rupee in the long run as well as in the short run. A 1% increase in vehicle and crude oil imports affect the depreciation of Sri Lankan rupee by 4.6% and, 14.98%, respectively, in the long run. The interest rate was found as an insignificant factor affect the changes of the exchange rate. Increasing export, promoting public transport system, encouraging fuel-efficient vehicles could be suggested to mitigate associated problem with currency depreciation of Sri Lanka.

Keywords: Currency Depreciation; Exchange Rate; Transport; Vehicle Imports; Crude Oil Imports

Australian Academy of Business and Economics Review, vol 3, issue 2, April 2017, pp 88-98